The Companies Act explained

Contributed by Anna Parrinder, Watson, Farley & Williams LLP.

After many years in the pipeline, the Companies Act 2006 finally received royal assent in November 2006. The Act, the longest Act ever passed in English parliamentary history, is intended to consolidate and update company law to reflect modern needs, particularly those of smaller businesses.

Key objectives of the Act are to simplify company law, to reflect the fact that the vast majority of companies in today’s business environment are small, and to introduce deregulatory measures to make it easier to set up and run a company in the UK.

Phased implementation

In order to ease transition to the new regime, implementation is being phased in over three years, with all provisions planned to be in force by 1 October 2009.

During 2007, certain key parts of the Act came into force, including provisions enabling companies to make greater use of electronic communications with shareholders and dealing with meetings and resolutions of shareholders. Of particular note, for private companies, are the new written resolution procedure for decisions of shareholders which is easier to use, the ability to hold shareholder meetings at shorter notice and the abolition of the requirement to hold an annual general meeting (although a company may still choose to do so).

In addition, the majority of provisions relating to directors, including certain of the newly codified duties of directors, have already come into force.

April 2008 implementation

Further provisions were implemented on 6 April 2008. These include the following important changes for private companies:

Company secretaries - private companies are no longer required to have a company secretary but may still choose to have one. However, tasks typically undertaken by a secretary, such as maintaining statutory registers, preparing board minutes and making filings with Companies House, will still need to be done by someone.

Execution of documents - documents required to be executed as deeds may now be executed by one director signing in the presence of a witness who attests the signature. This is in addition to the pre-existing regime (which is still available) under which a deed can be executed by signature of two directors or one director and the company secretary. The new provisions will make signature of deeds easier for all companies where only one director is readily available to sign a document.

Accounts/audit - most of the accounting and audit provisions of the Act came into force on 6 April 2008 and apply to accounts and reports for financial years beginning on or after that date. The reporting requirements for small companies are now set out in a single set of regulations. It should be noted, in particular, that the deadline for filing accounts with Companies House has been reduced from 10 months to 9 months, and private companies are no longer required to lay their accounts before the shareholders in a meeting (unless their constitutional documents require this), but must still circulate the accounts to shareholders. As before, small companies can take advantage of the exemption from audit if certain thresholds are satisfied - the financial thresholds have been raised.

Auditor liability limitation agreements - it is now possible for a company to enter into an agreement with its auditor to limit the liability of the auditor to the company in connection with its audit work. Any such agreement must be approved by the shareholders of the company, must only be in respect of one financial year and must be disclosed in a note to the annual accounts. The limitation of liability contained in the agreement may take any form but will only be effective to the extent that it is fair and reasonable in all the circumstances.

The future

Looking forward, certain additional provisions will come into force on 1 October 2008, before implementation of the remainder of the Act takes place on 1 October 2009.

Of particular interest in relation to October 2008 are the deregulatory provisions for private companies, which abolish the prohibition on financial assistance given for the acquisition of their own shares and which enable a capital reduction to be made by a solvency statement instead of by court order, as well as the remaining new statutory duties of directors relating to conflicts of interest and the requirement for a company to have at least one natural person as a director.

This article was contributed by law firm Watson, Farley & Williams LLP. For enquiries contact: corporate@wfw.com

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